Illinois' Tech Innovators

Tech incubators are putting Illinois on the innovation map—and bringing a wealth of jobs, funds and invention with them.
By Carolyn Kmet | Fall 2015

Once predominantly rooted within agriculture and manufacturing, the Illinois economy is experiencing a bit of a shift these days thanks to an influx of tech sector R&D.

According to the Bureau of Labor Statistics, in 2013 approximately 5.28 percent of Illinois’ private businesses resided in the high-tech space—above the national average of 4.47 percent, and more than double the 2.46 percent attributed to the high-tech sector in 1990.

With new businesses come new jobs. And according to an Illinois Science and Technology Coalition report released in 2014, over the past decade Illinois’ economy has generated more than 16,000 new jobs for Web developers, programmers and other computer-related occupations. This is certainly contributing to the state’s less daunting unemployment rate, which hit a low of 5.8 percent in July 2015—its lowest since August 2008.

Much of this growth would not be possible without the existence of technology and innovation incubators—companies that help new businesses get their start through shared workspaces, knowledge sharing and even funding. By reducing overhead costs and providing structured mentorship, these incubators can significantly reduce the risks associated with launching a new enterprise. According to the National Business Incubation Association, as of October 2012, there were more than 1,250 incubators in the United States, up from only 12 in 1980—and more than a third of these cater to technology firms.

Catapult, a Chicago-based cross between an incubator and a co-working space, is one example of an organization that’s supporting and boosting the efforts of tech startups. There are a variety of incubator program models, but Catapult distinguishes itself as a nonprofit focused on companies that already have demonstrated some business traction (usually having an existing staff of three to five employees, an existing though early product, and a little bit of capital raised). Catapult doesn’t take equity or provide funding in the businesses it incubates; rather, its singular objective is to accelerate growth by providing educational programming, mentoring and access to a strong community of like-minded entrepreneurs. The Catapult community is peer-selected, so founders of existing resident companies refer in and vote on new companies invited to join.

“Peer selection and business traction are huge, the premise being that from the most serious founders, those in the trenches know best who they want to work with side by side,” says Galen Mason, Catapult co-founder and an attorney with Foley & Lardner.
Mason explains that when done right, incubators provide entrepreneurs with not only ready access to the support necessary to drive the startup phase, but also the foundation for continuous growth. “Thus, incubators increase both the odds of someone starting a new enterprise and their subsequent success,” he says. Similarly, incubators also help entrepreneurs recognize poor ideas faster, which saves time and money in the long run.

To date, Catapult has seen 31 companies pass through its doors—18 alumni and 13 current residents. These companies have raised nearly $60M in funding and hired almost 400 employees.

Mason argues that small businesses create more jobs than established corporations tend to do. And, in fact, the Small Business Association reports that small businesses create seven out of every 10 new jobs, and have generated 64 percent of net new jobs over the past 15 years. Focusing specifically on incubators, a study commissioned by the US Economic Development Administration in 2008 reveals that for every $10,000 investment, business incubators created between 46 and 69 jobs.

As recently as October 2014, former Governor Pat Quinn announced a $1M investment in business incubator Chicago Innovation Exchange as part of the Illinois Jobs Now! program. These funds added to the University of Chicago’s $5.4M investment in the enterprise. “Our technology and innovation sectors are helping us grow and create new businesses and jobs across Illinois,” said Governor Quinn in a press release. “This investment will pay dividends for our state by giving students, faculty and local community entrepreneurs the opportunity to grow in Illinois.”

Chicago Innovation Exchange is part of a larger strategy to position the State of Illinois, the City of Chicago and the South Side as global destinations for discovery, innovation and entrepreneurial activity. These companies will address local and global issues in the areas of life sciences, water conservation, energy storage, high-powered computing, and more. Once completed, Chicago Innovation Exchange’s campus will have room for 300 innovators to work on their ventures on a daily basis, including 20 to 30 companies in the incubator space. In addition to resources, staff and University of Chicago students, the Exchange will feature partners such as the Argonne National Laboratory, Fermi National Laboratory and the Urban Education Institute. Corporate partners include JPMorgan Chase, Samsung and Cisco Systems. Several startups already have taken up residence, including Qualia Health, Quantitative Insights and Legacy Complete.

But job creation isn’t the only benefit of tech sector incubators; they contribute to wealth creation as well. Mason explains that the $60M in funding that Catapult companies raised generally reflects an increase in value that angels and venture capitalists, who are typically Illinois-based (although this is changing), are attributing to those companies.

“That in turn means more hiring, and eventually a return to those investors,” he says. That return can then be reinvested in other companies showing promise in incubators or the market generally, and the cycle becomes self-perpetuating.

“If you have more investments, you have more exits, and then more reinvestment, more jobs, more wealth, etc.” says Mason. “Getting these things started and moving quickly but thoughtfully is exactly what a good incubator does. It’s an engine of new growth that hopes to pay out scaleable returns for decades.”

What’s more, incubators help to position Illinois competitively within the overall domestic economy, which in turn enables the state to attract new businesses and investments.

“Think of Microsoft and Seattle, Google and Silicon Valley, Sears and Chicago,” says Mason. “Incubators help to ensure that our region is inherently thought of as a place where things can happen. Such branding reassures investors, attracts talent to the region and ‘seeds’ future growth.”

Whereas “large, established businesses optimize for execution on an existing revenue stream,” he contends, “startups by definition have no revenue stream and will die unless they create one. Incubators, when designed right, help to ensure that the startups most likely to create new technology have the best chance of success.”

That said, incubators provide indirect benefits to established businesses, as well. “It’s commonly the case that startups are solving issues that much larger, established businesses face,” Mason argues, explaining that startups may create a tool or process that enables established businesses to optimize their existing processes, which in turn makes them more cost-efficient. “Having a healthy base of startups in Illinois is a bit like outsourced research and development,” he observes. “Incubators are a constant well from which established businesses can look for ammunition in their fight to retain or grow market share.”

Plante Moran serves as Catapult’s accounting firm sponsor, and as such the firm consults with early stage Catapult clients to help them work through the growing pains of a startup business. “We’ve also helped companies identify opportunities that can help them as they grow. For example, some companies are developing new and unique solutions that could qualify them for research and development tax credits,” explains Matt Dopp, CPA, partner with Plante Moran.

Dopp recognizes the positive impact incubated companies have on the regional economy, explaining that, “We‘ve seen a number of companies graduate successfully through their incubators to leasing their own space with continued staff growth. Many of these companies have had a positive impact on the business community, as well as the local economy.”

Dr. Kyle Harfst is the executive director of Economic Development at Southern Illinois University Carbondale, as well as the executive director of the SIU Research Park, which sits on 41 acres and has approximately 200 full- and part-time people working on 20 different enterprises. The mission of both these institutions is to establish and support an environment that fosters innovation, commercialize University discoveries, and advance entrepreneurship and economic development within Southern Illinois and throughout the region. Looking at the numbers, in 2014 SIU Economic Development assisted 57 area businesses with either startup or expansion phases, which led to the creation or retention of 313 jobs, and secured $7.8M in financing and investment.

Harfst explains that organizations such as SIU Economic Development/SIU Research Park are instrumental in advancing the state’s economy in several ways. “We provide technical assistance to nascent entrepreneurs who have not yet started a business. In many cases, they are unsure of what it takes procedurally to start a business,” he says.

“Beyond that, they may need assistance in understanding their industry, obtaining relevant market research, assistance in writing a business plan, or assistance in obtaining financing.” A Technology and Innovation Services division further supports incubated businesses with services that include 3D prototyping and product development, guidance on protecting intellectual property, exploratory patent research and technology-focused market research.

Another Illinois incubator, EnterpriseWorks, focuses on science and research-based startups commercializing technology from the University of Illinois. Personify is one of EnterpriseWorks’ greatest success stories. This video-conferencing software company uses 3D technology based on software developed by Electrical and Computer Engineering Professor Sanjay Patel, Personify’s CEO and co-founder. The software visually separates the user from his or her environment and projects the resulting image within a shared digital space. In January of this year, Intel announced that it would begin including Personify’s new software in Windows computers outfitted with its new RealSense 3D camera.

"Imagine watching a movie online with your friends, or playing a game together while being able to see their faces, not in a separate video window, but together and overlaid in the same space, sharing the experience as a group," explains Patel in a Personify press release. "With Personify, that experience is possible today. From the beginning, our vision has been to make a video call feel more life-like."

Currently, there are more than 85 startups being incubated at EnterpriseWorks, and over 110 companies have graduated. According to numbers released in 2015, the incubator graduates approximately a third of its tenants annually. Of those graduates, 77 percent remain in Illinois. Furthermore, EnterpriseWorks incubated companies have raised more than $822M in outside capital.

Perhaps surprising for some, incubators have been a part of the Illinois government’s economic strategy for decades. Starting A Small Business Incubator: A Handbook for Sponsors and Developers, released by the Illinois Department of Commerce and Community Affairs back in 1985, stated that, “With the expansion of small firms within and beyond the incubator building itself, the local economy is strengthened; job opportunities are created; and physical, economic and social benefits can be achieved for the neighborhood and the city. Incubators themselves are not a cure-all for a troubled economic base, but they can be integral parts of broader economic development strategies at the local level.”

Thirty years later, incubators remain a key component of Illinois’ economic development strategy.